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It's the Money, Not the Fish

Bonneville Power, wind curtailments and the bigger picture.

Fortnightly Magazine - July 2012

the details of its proposed OMP regime:

“Limiting compensation to the costs pre-established under the cost curve alleviates the concerns ... regarding runaway cost exposure …

“If [we] did not adopt an oversupply protocol, generators that now displace voluntarily might refuse to do so, waiting until the price turned negative. In such case it would be difficult to predict how negative the price might go.” (See, BPA Compliance Filing, pp. 26-27, FERC Dkt. EL11-44, filed March 6, 2012.)

Industry opponents have seen right away, however, that these displacement cost payments are nothing but another form of negative price, but one that differs from an authentic negative market price in one key respect:

The negative price specified under Bonneville’s OMP displacement cost curve will be reached not by clearing competitive offers in a region-wide auction, but rather, by calculating the a specific price (cost) of curtailment separately for each individual wind resource, according to that unit’s individual profile of incremental cost.

In other words, Bonneville in effect is soliciting cost-based decremental bids from wind energy producers—to be expressed only in terms of lost PTCs and REC revenues—and then is clearing them on the now-discredited “pay as bid” model. In other words, Bonneville will pay each wind plant bidder differently, according to its own situation.

The Turlock Irrigation District highlighted this key point in written comments addressing Bonneville’s proposal:

“Bonneville is attempting to set up a process where costs are determined on a narrow view of what can be factored into the price offered for altering one’s generation dispatch.”

Turlock faulted Bonneville’s approach as inconsistent with market structures now employed widely throughout the country, which typically feature “a clearing price established for participants so that all are paid the same amount.” Turlock then cleverly compared Bonneville’s proposed cost-curve structure for allocating wind output against the very different profit expectations that prevail when Bonneville sends its zero-cost surplus hydropower south each summer, as it has done for decades, to sell in California at the going market price:

“Bonneville and others in the Northwest have no problem selling at prices [in California] that are unconstrained by the seller’s incremental cost of producing the energy sold.

“Bonneville makes no sound argument as to why such a market-clearing price approach should not be appropriate when it is seeking a sink for its energy.” (Comments, pp. 10-11, filed Mar. 27, 2010.)

Others also see market distortions arising from Bonneville’s refusal to incorporate honest-to-goodness negative market pricing in its wind power dispatch algorithm.

Powerex, the wholly owned export trade and marketing subsidiary of BC Hydro, argues that negative pricing isn’t “inherently dysfunctional or problematic.”

As Powerex points out, the California ISO has proposed lowering its bid floor from the current level of negative $30/MWh to minus $150/MWh, and then, absent any observed and unanticipated adverse impacts, possibly even further, to negative $300/MWh. (See, Comments, pp.10-13, filed March 27, 3012, citing California ISO Draft Final Proposal, Renewable Integration: Market and Product Review, Phase 1, Nov. 4, 2011.)

In its recommendation, the ISO states:

“There are … resources that simply cannot reduce